Change in definition brings relief to companies, CCs and trusts
Many a consultant, freelancer or labour broker has been frustrated by the definition of their services and the confusion about their status that has led clients to withhold tax from their fees.
This confusion has come about because of the numerous changes SA Revenue Services has made to the relevant definitions in the Fourth Schedule to the Income Tax Act, in recent years, says Erika Petersen-Holmes a partner in Shepstone & Wylie Attorneys’ Commercial Department, who reminds business that this has changed.
Since March 2009 there has been some relief, in that the definition of “”labour broker”” has been amended to exclude all companies, close corporations (CCs) and other juristic entities, but natural persons can qualify as “”labour brokers”” for tax purposes.
This means that labour brokers that are companies, CCs or trusts now no longer need to apply for exemption (IRP30) certificates and their clients need not withhold PAYE from their fees.
That is, unless the labour broking company, CC or trust qualifies as a personal service provider.
Three factors must be met before an entity qualifies as a personal services provider. Firstly the entity must be a company, cc or trust. Secondly the services must be rendered personally by people who are connected to the company, CC or trust. Thirdly any one of the following must apply:
• the people performing the services would be regarded as employees if they were providing the service directly to the client; or
• the duties are performed mainly at the clients premises and the person is under the clients control and supervision; or
• more than 80% of the companys or trusts income comes from one client.
However, even if these requirements are all met, the company or trust will still escape classification as a personal service provider if it has three or more full-time employees who are not members or shareholders of the company or trust and are not connected to the members or shareholders.